What is the difference between market failure and government

What is the difference between market failure and government failure? Is it difficult for markets to allocate scarce resources efficiently on its own? What are some of the problems the political system faces in overseeing markets?

Solution

Market failure is the standard justification for government action in neoclassical welfare economics. For some, market failures serve as a rationale for public intervention. The theory has two parts. The first is the presumption that the market processes are the default for allocating scarce resources. This amount to an assumption of perfect competition, where price information will direct self-interested market participants to correct \"mistakes\" or Pareto-dominated allocations, in resource use.

The second asserts that when competition is imperfect, the consequent \"market failure\" can and should be corrected bu government.

Government Failure arises when government has created inefficiencies because it should not have intervened in the first place or when it could have solved a given problem or set of problems more efficiently, that is, bu generating greater net benefits. In other words, the theoretical benchmark of Pareto optimality could be used to assess government performance just as it is used to assess market performance.

Market system resource allocation is heavily dependent on the variations of the price of the resources themselves. Price acts as an indicator to both the consumers and the sellers within the market.

This is believed to lead in turn to efficient resource allocation by the resource owners through:

Therefore efficient allocation of scarce resources is based on private consumption, production decisions or a combination of both at the market equilibrium price.